```
                                                                 
Child Care: States Exercise Flexibility in Setting Reimbursement 
Rates and Providing Access for Low-Income Children (18-SEP-02,	 
GAO-02-894).							 
                                                                 
Federal welfare legislation passed in 1996 placed a greater	 
emphasis on helping low-income families end dependence on	 
government benefits by promoting job preparation and work. To	 
reach this goal, the legislation gave states greater flexibility 
to design programs that use federal funds to subsidize child care
for low-income families. Under the Child Care and Development	 
Fund, this flexibility includes the freedom to largely determine 
which low-income families are eligible to receive child care	 
subsidies. These maximum rates consist of two parts--a state	 
subsidy and family co-payment. States also establish maximum	 
reimbursement rates for child care. States reported considering  
market rate survey and budget and policy goals in setting maximum
reimbursement rates. All states reported conducting market rate  
surveys in the past 2 years that obtained data on providers'	 
fees, but 10 states reported that they did not base the 	 
reimbursement rates for child care providers on their most recent
market rate surveys. In the nine communities visited, GAO	 
calculated that hypothetical families' access to child care	 
centers and family home providers varied widely as a result of	 
the different subsidies and family co-payments established by	 
each state.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-894 					        
    ACCNO:   A04635						        
  TITLE:     Child Care: States Exercise Flexibility in Setting       
Reimbursement Rates and Providing Access for Low-Income Children 
     DATE:   09/18/2002 
  SUBJECT:   Child care programs				 
	     Disadvantaged persons				 
	     Federal aid to states				 
	     Federal/state relations				 
	     Public assistance programs 			 
	     State-administered programs			 
	     Subsidies						 
	     Workfare						 
	     Aid to Families with Dependent Children		 
	     Program						 
                                                                 
	     HHS Child Care and Development Fund		 
	     Temporary Assistance for Needy Families		 
	     Program						 
                                                                 

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GAO-02-894

Report to Congressional Requesters

United States General Accounting Office

GAO

September 2002 CHILD CARE States Exercise Flexibility in Setting
Reimbursement Rates and Providing Access for Low- Income Children

GAO- 02- 894

Page i GAO- 02- 894 Child Care Reimbursement Rates Letter 1

Results in Brief 2 Background 4 Most States Reported Considering Market
Rate Survey Results, but

Also Considered Budgets and Other Factors in Setting Child Care
Reimbursement Rates 8 In Selected Communities, Different Subsidies and Co-
Payments

Resulted in Varied Access to Child Care for Low- Income Families 14
Concluding Observations 26 Agency Comments 27

Appendix I Scope and Methodology 28 GAO Survey of State Child Care
Officials 28 Case Studies in Nine Communities across Three States 28 Other
Related Activities 31

Appendix II Reimbursement Rates for Informal Child Care Providers in the
Remaining Eight Communities 32

Appendix III Comments from the Department of Health and Human Services 34

Appendix IV GAO Contacts and Staff Acknowledgments 38 GAO Contacts 38
Staff Acknowledgments 38

Related GAO Products 39

Tables

Table 1: Types and Descriptions of Child Care Providers 6 Table 2:
Characteristics of Locations Visited in Illinois 15 Table 3: Comparison of
Reimbursement Rates and Providers* Fees

for a 2- Person Family (Parent and 2- year- old) in Three Communities in
Illinois 16 Contents

Page ii GAO- 02- 894 Child Care Reimbursement Rates

Table 4: Characteristics of Locations Visited in Maryland 16 Table 5:
Comparison of Reimbursement Rates and Providers* Fees

for a 2- Person Family (Parent and 2- year- old) in Three Communities in
Maryland 17 Table 6: Characteristics of Locations Visited in Oregon 18
Table 7: Comparison of Reimbursement Rates and Providers* Fees

for a 2- Person Family (Parent and 2- year- old) in Three Communities in
Oregon 18 Table 8: The Percent of Family Home Providers and Child Care

Centers in Nine Communities Indicating Willingness to Accept Subsidies 19
Table 9: Family Co- Payments as a Percent of Monthly Income in

the Nine Communities for Child Care Centers and Family Homes 22 Table 10:
Family Co- Payments as a Percent of the Maximum

Reimbursement Rate for Child Care in Maryland, Illinois, and Oregon
Communities for Family Home Care 23 Table 11: Family Co- Payment and State
Share of Monthly Child

Care Expenses for a 2- Person Family (Parent and 2- yearold) Using
Informal Providers in Baltimore, Maryland 25 Table 12: Family Co- Payment
and State Share of Monthly Child

Care Expenses for a 2- Person Family (Parent and 2- yearold) Using
Informal Providers in Chicago (south side), DuPage County, and DeKalb
County, Illinois 32 Table 13: Family Co- Payment and State Share of
Monthly Child

Care Expenses for a 2- Person Family (Parent and 2- yearold) Using
Informal Providers in Montgomery County, Maryland 32 Table 14: Family Co-
Payment and State Share of Monthly Child

Care Expenses for a 2- Person Family (Parent and 2- yearold) Using
Informal Providers in Wicomico County, Maryland 33 Table 15: Family Co-
Payment and State Share of Monthly Child

Care Expenses for a 2- person Family (Parent and 2- yearold) Using
Informal Providers in the city of Portland and Washington County, Oregon
33 Table 16: Family Co- Payment and State Share of Monthly Child

Care Expenses for a 2- person Family (Parent and 2- yearold) Using
Informal Providers in Linn County, Oregon 33

Page iii GAO- 02- 894 Child Care Reimbursement Rates Figures

Figure 1: Required Family Co- Payments and State Subsidies by Family
Income for Family Home Care in Linn County, Oregon 4 Figure 2: Number of
States that Reported Surveying Specific Types

of Providers 10 Figure 3: Number of States that Reported Using Various
Types of

Geographical Areas to Define Child Care Reimbursement Rate Areas 11 Figure
4: Required Family Co- Payments and State Subsidies by

Family Income for Family Home Care in Linn County, Oregon 21

Abbreviations

AFDC Aid to Families with Dependent Children CCDF Child Care and
Development Fund CCR& R child care resource and referral HHS Department of
Health and Human Services PRWORA Personal Responsibility and Work
Opportunity

Recomciliation Act of 1996 SMI state median income TANF Temporary
Assistance for Needy Families

Page 1 GAO- 02- 894 Child Care Reimbursement Rates

September 18, 2002 The Honorable Edward M. Kennedy Chairman, Committee on
Health, Education, Labor

and Pensions United States Senate

The Honorable Christopher J. Dodd Chairman, Subcommittee on Children and
Families Committee on Health, Education, Labor and Pensions United States
Senate

The Honorable Jack Reed United States Senate

Federal welfare reform legislation passed in 1996 placed a greater
emphasis on helping low- income families end dependence on government
benefits by promoting job preparation and work. To reach this goal, the
legislation gave states greater flexibility to design programs that use
federal funds to subsidize child care for low- income families. Under the
Child Care and Development Fund (CCDF), this flexibility includes the
freedom to largely determine which low- income families are eligible to
receive child care subsidies. States also establish maximum reimbursement
rates for child care. These maximum reimbursement rates consist of two
parts* a state subsidy and family co- payment. The state subsidy is the
state*s share of the reimbursement rate; the co- payment is the family*s
share* the part of the reimbursement rate that they are expected to pay to
the child care provider. A maximum reimbursement is the highest amount
paid to a provider for rendering child care services. These reimbursement
rates have significant implications for low- income families and their
participation in states* subsidized child care programs. Co- payments may
be related to affordability for families, and reimbursement rates may
affect which providers are willing to participate and to whom they will
provide access. To assist states in establishing child care reimbursement
rates, the U. S. Department of Health and Human Services (HHS) requires
them to perform market rate surveys that measure the fees charged by
providers.

This report responds to your request that we (1) describe how states set
reimbursement rates and (2) calculate to what extent subsidies and co-
payments allow families access to specific types of child care providers

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 894 Child Care Reimbursement Rates

in selected communities. To describe how states set reimbursement rates,
we conducted a survey of child care officials in the 50 states and the
District of Columbia and received responses from 49 of them. We also
visited 3 states (Illinois, Maryland, and Oregon) and interviewed
officials in state, local, and community- based organizations in three
locations in each state* one urban, one suburban, and one rural. Our field
work was performed in Chicago, DuPage County, and DeKalb County, Illinois;
Baltimore, Montgomery County, and Wicomico County, Maryland; and Portland,
Washington County, and Linn County, Oregon. In selecting these locations,
we sought to include states that had (1) child care resource and referral
(CCR& R) networks with comprehensive data on providers and the fees they
charged; (2) model market rate surveys; (3) varying income eligibility
limits, reimbursement rates, and co- payment fees; (4) different
utilization patterns for informal child care providers; and (5) some
geographic diversity. To calculate the extent to which reimbursement rates
afforded families access to specific types of child care, we obtained
information on the fees charged by certain types of child care providers
in each of the nine locations we visited and compared them with
stateestablished reimbursement rates for a 2- year- old living with one
parent. 1 Because of the limited number of communities in our study, the
results of our work are not generalizeable. Our work was done between
November 2001 and June 2002 in accordance with generally accepted
government auditing standards. (Appendix I contains a more detailed
discussion of our scope and methodology.)

States reported considering market rate survey results and budget and
policy goals in setting maximum reimbursement rates. All states reported
conducting market rate surveys in the past 2 years that obtained data on
providers* fees, but 10 states reported that they did not base the
reimbursement rates for child care providers on their most recent market
rate surveys. States also set differing reimbursement rates based on
geographical differences in providers* fees and children*s ages. For
example, some states set reimbursement rates based on political boundaries
such as counties and municipalities. In addition, states reported that
their current budgets were a very important factor in establishing
reimbursement rates. States also indicated that they

1 For this report, families are deemed to have access to specific child
care providers if the state maximum reimbursement rate is equal to or
greater than the provider*s fees. Results in Brief

Page 3 GAO- 02- 894 Child Care Reimbursement Rates

considered policy goals, such as improving provider quality and increasing
access for special needs children, in setting rates.

In the nine communities visited, we calculated that hypothetical families*
access to child care centers and family home providers varied widely as a
result of the different subsidies and family co- payments established by
each state. The state reimbursement rates, which consist of the states*
subsidies and the families* co- payments, would have allowed a
hypothetical family in different communities to purchase care from
different percentages of those providers who were willing to accept
subsidies, ranging from as low as 6 percent of family home providers in
suburban DuPage County to as high as 71 percent of family home providers
in the south side of Chicago. In one Oregon community, the maximum
reimbursement rate for family home care for a family of two was $340 per
month and, at that rate, the family could purchase child care from 10
percent of family home providers that accepted subsidies. The family*s
financial responsibility to pay for that child care increased
substantially as its income increased. For example, an Oregon family*s
share of the reimbursement rate increased from $85 to $271 when its
monthly income increased from 100 percent to 150 percent of the federal
poverty threshold ($ 1, 017 to $1, 526). (See fig. 1.) However,
reimbursement rates may not strictly limit families* choices among child
care providers. State and local officials told us that, in some cases,
families were able to reach financial agreements with child care providers
who were willing to accept the reimbursement rate as full payment even
though it was below the price charged nonsubsidized families. State and
local officials were unable to provide information on how often this
occurred. Families often relied on informal child care providers who were
generally reimbursed at lower rates than states paid formal, regulated
providers.

Page 4 GAO- 02- 894 Child Care Reimbursement Rates

Figure 1: Required Family Co- Payments and State Subsidies by Family
Income for Family Home Care in Linn County, Oregon

Source: For family income, U. S. Census Bureau poverty thresholds for 2001
were used. We obtained the amount of the state subsidy and family co-
payment from the state of Oregon*s Department of Human Services.

Welfare reform legislation, the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (PRWORA), eliminated the federal
entitlement to cash assistance under the Aid to Families with Dependent
Children (AFDC) program and replaced it with a program of block grants to
states known as the Temporary Assistance for Needy Families (TANF)
program. At the same time, Congress amended the Child Care and Development
Block Grant Act of 1990, and required HHS to consolidate federal child
care funds and administer them as a unified program. HHS named this
program the Child Care and Development Fund. The intent of CCDF is to
support state- administered child care programs for both families
receiving public assistance and low- income working families not receiving
public assistance. Since welfare reform, federal expenditures for CCDF
have increased significantly from $2.1 billion in fiscal year 1996 to
Background

0 50

100 150

200 250

300 350

$1,017 $1,526 Family monthly income

State subsidy Co- payment (for a family of 2) Maximum reimbursement rate

$85 $271

$255 $69

Page 5 GAO- 02- 894 Child Care Reimbursement Rates

$5.3 billion in fiscal year 2000. 2 In fiscal year 2002, about $4.8
billion was appropriated for CCDF. States also contributed to CCDF, and
their funding for this program has nearly doubled from about $1.0 billion
in fiscal year 1996 to $1.9 billion in fiscal year 2000. The average
number of children who received subsidized child care each month also
increased from about 1.2 million in fiscal year 1996 to 1.7 million in
fiscal year 2000.

States receive CCDF funds from potentially four funding streams. Each
state*s annual federal allocation consists of separate discretionary,
mandatory, and matching funds. A state does not have to obligate or spend
any state funds to receive the discretionary and mandatory funds. 3
However, to receive federal matching funds* and thus its full CCDF
allocation* a state must maintain its program spending at a specified
level, referred to as a state*s maintenance of effort, and spend
additional state funds above that level.

In addition to consolidating federal funds, PRWORA significantly changed
federal child care policy by giving states maximum flexibility to design
child care programs for low- income families. States have broad discretion
to establish subsidy amounts, family co- payments, and eligibility limits.
States set maximum reimbursement rates that consist of two parts* the
state subsidy paid directly to a provider and the co- payment the family
pays to a provider. 4 These co- payments vary according to family income
and size, and the amount of the state subsidy declines as the family
copayment rises. Co- payments can be waived for any eligible family whose
income is at or below the federal poverty threshold, including those in
the TANF program, and for children in protective services on a case- by-
case basis. 5 As of March 2001, 23 states waived co- payments for TANF
families engaged in TANF or other work activities. According to federal
law, states

2 PRWORA allows states the flexibility to transfer up to 30 percent of
their TANF funds to CCDF. These transfer funds are included in the federal
expenditures of CCDF for fiscal years 1996 and 2000.

3 Discretionary funds are allocated according to formulas specified in the
Child Care and Development Block Grant Act. Mandatory, or guaranteed,
funds are fixed amounts based on each state*s historic levels of child
care spending related to Aid to Families with Dependent Children.

4 In the states we visited, when providers* fees were less than the
maximum reimbursement rate, states reduced their subsidies and family co-
payments remained the same. 5 For 2001, the federal poverty threshold for
a 2- person family, including an adult under age 65 and a child under 18
years of age, is $12,207.

Page 6 GAO- 02- 894 Child Care Reimbursement Rates

can set income eligibility limits up to 85 percent of the state median
income (in 2000, this limit ranged from a low of $24,694 for West Virginia
households to a high of $43,941 in Maryland), but most states set
eligibility limits below that level. In the three states we visited,
Oregon reported setting its income eligibility limit at 70 percent of the
state median income, Maryland at 50 percent, and Illinois at 43 percent.
States are not required to provide assistance to all families that fall
within state- established eligibility guidelines, but they are required to
give priority to children in very low- income families and to children
with special needs. The program serves children up to age 13, but HHS
allows states to provide child care services to children with special
needs up to age 19.

CCDF subsidies can be used to obtain child care from various types of
providers such as child care centers and family homes. 6 Child care
centers, group homes, and family homes are most often regulated but some
are legally exempt depending on the state. Table 1 provides descriptions
of the types of child care providers generally used by subsidized
families.

Table 1: Types and Descriptions of Child Care Providers Type of provider
Description a

Child care center Care typically provided for 12 or more children in a
nonresidential facility. Group home Care generally provided for between 6
and 12 children in a private

residence with an assistant. Family home Care generally provided for a
small group of children in a provider*s

home. Informal b Other legally operating care given by adults, including
relatives and

friends, and generally unregulated. a Table 1 provides a general
description of different types of child care providers. In actuality,
states

define child care differently and have different licensure and regulatory
requirements. b This type of provider includes in- home and unregulated
family child care.

Source: U. S. General Accounting Office, States Increased Spending on Low-
income Families,

GAO- 01- 293 (Washington, D. C.: Feb. 2, 2002) and Implications of
Increased Work Participation for Child Care, GAO/ HEHS- 97- 75
(Washington, D. C.: May 29, 1997).

States must provide subsidies through vouchers, but some states also made
child care available from providers who have contracts with them. 7 Two of
the three states we visited made this option available to subsidized

6 Child care providers may elect not to participate in the state child
care subsidy program. 7 Vouchers are certificates indicating that the
state will pay a specific amount of the child care fee to a provider who
is chosen by the family.

Page 7 GAO- 02- 894 Child Care Reimbursement Rates

families. Illinois had contracts with some child care centers to serve
children of subsidized families. As of June 2000, Illinois reported that
contracted facilities served about 12 percent of the total number of
children in the state*s subsidized child care program. Oregon contracted
with child care providers primarily to serve children from targeted, at-
risk families.

Periodically, states adjust their reimbursement rates, co- payment levels,
and income eligibility limits. These policy decisions can affect families*
access to child care providers. For example, if states set reimbursement
rates too low, some providers might choose not to serve children of
subsidized families. On the other hand, if states set reimbursement rates
too high, some providers might replace children of nonsubsidized families
with those of subsidized families. Co- payment levels are also important.
For example, in Oregon, one study indicated that, in some cases, a
family*s economic position worsened as a parent moved from a job paying $6
per hour to one paying $8 per hour because increases in the family*s
earnings were more than offset by decreases in child care and other
subsidies. 8

HHS is charged with providing oversight, technical assistance and guidance
to states, which have responsibility for administering CCDF programs. HHS
requires states to submit biennial state CCDF plans that include, among
other things, certification that within the past 2 years they performed a
market rate survey. A market rate survey is a tool to be used by states to
obtain information about providers, including the fees they charge, the
type of child care they provide, the age groups of the children they
serve, and where they are located. Although states are required to conduct
market rate surveys every 2 years and consider the results, they are not
compelled to use them in setting child care reimbursement rates. States
are also required to certify that they met the equal access provision, a
part of the federal law that requires states to set rates that are
sufficient to provide access to child care services for eligible families
that are comparable to those of families that do not receive subsidies.
While HHS reviews and approves CCDF state plans, states have substantial
discretion in determining the basis on which they will certify to HHS that
they meet the equal access provision. HHS has authority to sanction states
if they do not substantially comply with the law, but HHS officials told
us that these

8 John Tapogna and Tara Witt, ECONorthwest, Making the Transition to Self-
Sufficiency In Oregon, September 30, 1998.

Page 8 GAO- 02- 894 Child Care Reimbursement Rates

sanctions have never been used. 9 HHS provided guidance indicating that
co- payment levels at no more than 10 percent of family income could be
considered affordable and reimbursement rates set at least at the 75th
percentile of providers* fees can be presumed to provide equal access. In
this case, the maximum rate paid by the state and the family would be
equal to or greater than the fees charged by 75 percent of providers or
for 75 percent of providers* slots. However, states are free to set co-
payments and reimbursement rates at other levels.

States used the results of market rate surveys to help set child care
reimbursement rates, but also reported considering other factors such as
budgets in rate setting. Consistent with HHS guidance, 40 states reported
that the survey results were an important consideration when setting
reimbursement rates. 10 However, 10 states did not use their most recent
surveys in setting current reimbursement rates. States establish different
rate schedules for geographical areas and different age groups of
children. To establish their rates, states often set maximum reimbursement
rates at a percentile of the distribution of providers* fees. However, in
setting their child care reimbursement rates, many states considered their
budgets and other policy goals. Thirty- two states reported that their
current budgets were of great importance when setting reimbursement rates.
Other factors that states considered important in setting their rates
included achieving policy goals such as expanding eligibility, improving
child care quality, and increasing the supply of certain types of child
care providers.

Most states reported using their current market rate survey results to
help set reimbursement rates; some states reported that they referred to
less current survey information. Forty states reported that the results of
their most recent market rate survey were very important in determining
their current child care reimbursement rates. However, while 10 states
reported

9 According to written comments from HHS, the department has not imposed
monetary sanctions for failing to comply with CCDF equal access
provisions; however, in a number of instances, HHS has refused to approve
state plans because states had not conducted a market rate survey within
the period stipulated in the regulations. In such instances, states were
given a limited time period to come into compliance, and HHS commented
that this approach had worked in each case.

10 Throughout the report, when referring to the number of states that
responded to our survey, we are including the District of Columbia in the
49 jurisdictions. Child care officials in Florida and New Jersey did not
respond to our questionnaire. Most States Reported

Considering Market Rate Survey Results, but Also Considered Budgets and
Other Factors in Setting Child Care Reimbursement Rates

Most States Reported Considering Market Rate Survey Results in Setting
Rates

Page 9 GAO- 02- 894 Child Care Reimbursement Rates

that they had completed current market rate surveys as required by
regulations, they used less current market rate survey results to set
their rates. The market rate surveys they used were not completed within 2
years of their approved fiscal year 2001 CCDF plans. Of these, 3 states
(Michigan, North Dakota, and West Virginia) considered 1999 market rate
survey results, 5 states (Arizona, District of Columbia, Illinois, Iowa,
and North Carolina) reported considering results from 1998 market rate
surveys, 1 state (New Hampshire) considered results from 1994, and 1 state
(Missouri) considered market rate survey results from 1991 and 1996. 11

States reported that their market rate survey results primarily included
data on providers* fees from regulated child care center, family home, and
group home providers. For example, 48 states surveyed regulated child care
centers and 47 states surveyed regulated family home providers. In
contrast, 24 states surveyed unregulated providers. 12 Of these, 15 states
reported that they obtained information about child care fees from
relatives and/ or other unregulated providers, such as religious-
affiliated child care providers. (See fig. 2 for the types of providers
that states indicated were included in their market rate surveys.)

11 The 1999 market rate survey results used by these states were more than
2 years older than their fiscal year 2002- 2003 state CCDF plans. Even
though 10 states reported that they did not refer to their most recent
market rate survey results, 4 of these states reported that reimbursement
rates had been incrementally increased.

12 Some states may not have surveyed unregulated providers because of
difficulties in identifying them and obtaining information about them.

Page 10 GAO- 02- 894 Child Care Reimbursement Rates

Figure 2: Number of States that Reported Surveying Specific Types of
Providers

Note: Most states included more than one type of provider in the market
rate survey. Source: GAO survey responses from 48 states and the District
of Columbia.

After an examination of those fees, state officials decided whether and
how to divide the state into regions based on variations in providers*
fees. State officials may use a variety of methods for dividing the state
into regions. As shown in figure 3, 18 states reported setting rates for
multicounty regions, and 16 states set rates based on political
boundaries, such as counties or municipalities. Illinois and Maryland, two
of the states we visited, established reimbursement rate schedules that
combined areas into multicounty regions. These regions generally consisted
of counties that were not necessarily contiguous to one another but were
designed to capture providers who charged similar fees. Oregon, the third
state we visited, grouped zip codes with comparable providers* fees into
three reimbursement rate areas. Conversely, 14 states reported that they
did not pay different reimbursement rates to providers based on their
location. In some cases, officials reported they did not divide the state
into regions because there was little variation in fees across the state.

0 10

20 30

40 50

Centers

Regulated Unregulated

Family homes Group homes Relatives, others 48

6 47

9 34

2 1 15

Page 11 GAO- 02- 894 Child Care Reimbursement Rates

Figure 3: Number of States that Reported Using Various Types of
Geographical Areas to Define Child Care Reimbursement Rate Areas

Note: Some states reported using more than one method. Source: GAO survey
responses from 48 states and the District of Columbia.

Most states also reported setting distinct child care reimbursement rates
based on the age group of the child needing care. The states we visited,
for example, had differing rates for infants and school aged children. In
addition, separate rates were often used for child care providers who
accepted special needs children, exceeded quality standards, or offered
evening and/ or weekend care. For example, 24 states reported that they
had distinct child care reimbursement rates for providers whose care
exceeded state quality standards.

In setting their reimbursement rates, most states ranked providers* fees
by type and location of care from highest to lowest, and set maximum
reimbursement rates at a percentile of these fees. HHS suggested that
states set their maximum child care reimbursement rate at least at the
75th percentile based on the most recent market rate survey results. In
responding to our survey, 21 states indicated that they did so. An

0 5

10 15

20 Multicountyregions

Urban/ ruralcounties Municipalities

Zip codes 18

16 3

1

Page 12 GAO- 02- 894 Child Care Reimbursement Rates

additional 7 states indicated that they set rates at least at the 75th
percentile but used a more dated survey. 13

While states most often reported that market rate survey results were very
important in setting child care reimbursement rates, they also reported
that their state budget and policy goals were important factors considered
when setting rates. For example, 32 states reported that the amount of
their current budget was of great importance when setting child care
reimbursement rates. Budgets are important because they establish a
financial framework for developing programs and policy goals. State budget
processes and their contributions to CCDF affect the amount of money that
states choose to spend on child care. During the budget process, trade-
offs occur when state decision makers must balance policy goals and
program needs against available resources. One potential result of such
trade- offs could be that as resources available for child care programs
become constrained, more states might be reluctant to adjust their maximum
reimbursement rates in line with recent market rate surveys. However, in
our survey, child care officials in 27 states indicated that they expected
their child care budgets to remain the same, and child care officials in
11 states expected their child budgets to increase in the next fiscal
year. 14

Some state officials told us they used income limits and family co-
payments to manage child care program expenditures and to target child
care subsidies. Under CCDF, states are permitted to set income eligibility
limits to include families whose incomes are up to 85 percent of the state
median income (SMI), but most states set their limits below the allowable
federal level. They may do so to accommodate state budgetary constraints,
to target poorer families, or both. In our survey, states reported setting
income eligibility limits that ranged from 42 percent of the SMI (in
Missouri) to 105 percent of the SMI (in Pennsylvania). 15 States also
varied co- payments to accommodate their budgets and to target certain

13 Of the remaining 18 states that reported, 10 states set rates below the
75th percentile based on the most recent market rate survey, and 8 states
set rates using various other methods. Three states did not respond to
this item in our questionnaire.

14 We surveyed child care officials in March 2002 and their responses
reflected their views as of that date. 15 In some cases, state child care
funds can be used to set eligibility limits beyond 85 percent of SMI.
States Reported Their

Budget and Policy Goals Were Also Considered in Rate Setting

Page 13 GAO- 02- 894 Child Care Reimbursement Rates

families. In Oregon, for example, as our hypothetical family*s income
increased from 75 percent to 150 percent of the federal poverty threshold,
required co- payments increased from 6 percent to 18 percent of monthly
income.

States also considered other child care policy goals in setting their
reimbursement rates. Thirty- eight states reported that they used
reimbursement rates to encourage child care providers to achieve specific
results such as expanding eligibility and improving child care quality.
Specifically, 29 states reported that they used reimbursement rates to
encourage providers to increase staff education or training, 26 states
used rates to encourage providers to make general improvements in quality,
20 states used rates to encourage providers to increase access to their
facilities for special needs children, and 18 states reported using
reimbursement rates to encourage improvements in providers* facilities
that promote children*s health and safety. In some states, providers
received higher reimbursement rates for achieving these results.

The three states we visited used reimbursement rates in different ways in
pursuit of specific policy goals within their child care programs. For
example, Illinois encouraged child care centers to increase the number of
child care slots available to low- income families with infants and
toddlers by paying up to an additional 10 percent to center providers who
served a large number of subsidized children 2 years old or younger. For
fiscal year 2000, the state reported that an additional 390 slots for
subsidized infants and toddlers were added as a result of this initiative.
Illinois also implemented a statewide initiative that paid providers an
additional subsidy amount to care for children with disabilities. Based on
receiving the increased subsidies, providers were expected to purchase
adaptive equipment and obtain specialized training to improve the care
they gave these children. In Maryland, a tiered reimbursement rate
program* paying different rates to child care providers based on program
accreditation, staff credentialing, continued training, staff
compensation, and other achievements* was established to improve the
qualifications of the child care workforce, encourage parent involvement,
and promote a high level of program quality. Few states reported having
evaluated the effects of such uses of reimbursement rates.

Page 14 GAO- 02- 894 Child Care Reimbursement Rates

In the nine communities we visited, we calculated that the maximum
reimbursement rates afforded hypothetical 2- person families widely
different levels of access to child care providers who accepted the
subsidy. 16 The state reimbursement rates, which consist of the states*
subsidies and families* co- payments, allowed hypothetical families, for
example, to purchase care from 6 percent to 71 percent of family home
providers who accepted the subsidy in these nine communities. Families
generally could afford child care from a greater percentage of providers
in urban communities than suburban and rural communities. In all three
states, the states* subsidies decreased as families* incomes increased;
this sometimes resulted in steep increases in family co- payments. These
required co- payments ranged from 1 percent to 18 percent of a
hypothetical family*s income, varying by the level of income. However,
reimbursement rates may not strictly limit families* choices among child
care providers. State officials reported that families were sometimes able
to make financial arrangements with formal, regulated providers whose fees
exceeded state reimbursement rates. In addition, families could obtain
care they needed or wanted from informal providers who were generally
reimbursed at lower rates than states paid formal, regulated providers.
State officials were unable to provide information on how often these
circumstances occurred.

The affordability of child care for hypothetical families of two
(consisting of a parent and 2- year- old) varied as a result of different
subsidies and co- payments in nine selected communities. Moreover, the
choice that rates afforded families among available providers was
generally greater in urban communities than in suburban and rural
communities. The only exception was among family home providers in
Maryland, where families were able to afford a greater portion of this
type of care in suburban and rural communities.

We visited three communities in Illinois* one urban, one suburban, and one
rural. Table 2 shows the characteristics of Chicago, DuPage County, and
DeKalb County.

16 This family size was selected after reviewing fiscal year 1999 TANF
recipient data that showed that most single parent families have one
child. Most TANF cases that include adults have only one parent. TANF data
were used because HHS did not have similar data on the family composition
of those using CCDF subsidies. In Selected

Communities, Different Subsidies and Co- Payments Resulted in Varied
Access to Child Care for Low- Income Families

Affordability of Specific Types of Child Care Varied Widely as a Result of
Subsidies and Co- payments in Nine Communities

Illinois

Page 15 GAO- 02- 894 Child Care Reimbursement Rates

Table 2: Characteristics of Locations Visited in Illinois Location

Geographic area

Estimated population

Median household

income Percent of

people living in poverty

Chicago a Urban 2.8 million $63,800 22 DuPage County Suburban 904,000
$64,365 4 DeKalb County Rural 89,000 $46,964 8 Statewide Not applicable
12.4 million $45,803 11 a In this table, the description of Chicago is for
the entire city. Our analysis of providers* fees is only for the south
side of the city. Source: Characteristics of the geographic areas were
obtained from the city of Chicago government and the Illinois Network of
Child Care Resource and Referral Agencies; population estimates, median
household income, and poverty thresholds were obtained from the city of
Chicago government and the U. S. Census Bureau.

While Illinois set the same reimbursement rate for child care centers for
these three communities, the extent to which the rates afforded choice
among family home providers and child care centers varied widely,
resulting sometimes in large differences between prevailing local fees and
maximum reimbursement rates. For example, of those family home providers
who accepted child care subsidies, 6 percent to 71 percent had fees that
were within (i. e., equal to or less than) the maximum reimbursement rate.
Of those child care centers that accepted subsidies, 30 percent to 100
percent had fees within the rate. Moreover, to provide our hypothetical
low- income families with greater access to family home providers in
DuPage County would require a significant increase in the state*s maximum
reimbursement rate. Specifically, to allow families access to
approximately 50 percent of the family home providers, the maximum
reimbursement rate would need to be raised 39 percent from $466 to $650, a
monthly increase of $184. See table 3 for comparisons of providers* fees,
reimbursement rates, and percent of providers accepting subsidies who
charged fees within the reimbursement rate in three Illinois communities.

Page 16 GAO- 02- 894 Child Care Reimbursement Rates

Table 3: Comparison of Reimbursement Rates and Providers* Fees for a 2-
Person Family (Parent and 2- year- old) in Three Communities in Illinois

Community Type of

child care

Maximum reimbursement

rate Median price Total number

of providers No. of

providers accepting subsidies

No. of providers within reimbursement rate

and accepting subsidies

Percent of subsidyaccepting

providers within rate

Chicago (south side) Family

home $466 $466 732 713 509 71 Chicago (south side) Center $731 $433 99 94
89 95 DuPage County Family

home $466 $650 345 161 9 6 DuPage County Center $731 $753 97 86 26 30
DeKalb County Family

home $414 $433 95 61 18 29 DeKalb County Center $731 $595 12 12 12 100

Note: The number of centers accepting subsidies included those that were
contracted by the state to provide child care to subsidized children.

Source: Our calculations based on provider data obtained from the Illinois
Network of Child Care Resource and Referral Agencies and the Illinois
Department of Human Services.

We visited three communities in Maryland* one urban, one suburban, and one
rural. Table 4 shows the characteristics of Baltimore, Montgomery County,
and Wicomico County.

Table 4: Characteristics of Locations Visited in Maryland Location
Geographic area

Estimated population

Median household

income Percent of

people living in poverty

Baltimore Urban 651,000 $33,900 22 Montgomery County Suburban 873,000
$70,100 5 Wicomico County Rural 85,000 $36,400 13 Statewide Not applicable
5.3 million $52,346 9

Source: Characteristics of the geographic areas were obtained from the
Wicomico County government and the Maryland Committee for Children;
population estimates, median household income, and poverty thresholds were
obtained from the U. S. Census Bureau.

Across the three Maryland communities, the reimbursement rates afforded
our hypothetical families varied access to family home providers and child
care centers. As shown in table 5, of those family home providers who
accepted child care subsidies, 45 percent to 64 percent had fees that were
within the maximum reimbursement rate. The percent of participating child
care centers that had fees within the rate varied* from 37 percent to
Maryland

Page 17 GAO- 02- 894 Child Care Reimbursement Rates

68 percent. In contrast to Illinois, providing low- income families with
greater access to subsidized child care in Maryland would generally
require smaller increases in the states* maximum reimbursement rates. For
example, to allow families access to approximately 50 percent of the child
care centers in Wicomico County, would require raising the maximum
reimbursement rate 5 percent from $358 to $375, a monthly increase of $17.
See table 5 for comparisons of providers* fees, reimbursement rates, and
percent of providers accepting subsidies who charged fees within the
reimbursement rate in three Maryland communities.

Table 5: Comparison of Reimbursement Rates and Providers* Fees for a 2-
Person Family (Parent and 2- year- old) in Three Communities in Maryland

Community Type of child care

Maximum reimbursement

rate Median price

Total number of

providers No. of

providers accepting subsidies

No. of providers within reimbursement

rate and accepting subsidies

Percent of subsidyaccepting

providers within rate

Baltimore Family home $429 $433 1159 1118 501 45 Baltimore Center $433
$417 77 77 52 68 Montgomery County Family

home $596 $563 634 495 241 49 Montgomery County Center $659 $669 76 69 33
48 Wicomico County Family

home $325 $325 160 123 79 64 Wicomico County Center $358 $375 20 19 7 37

Source: Our calculations based on provider data obtained from the Maryland
Committee for Children and the local subsidy agencies for Baltimore,
Montgomery County, and Wicomico County.

We visited three communities in Oregon* one urban, one suburban, and one
rural. Table 6 shows the characteristics of Portland, Washington County,
and Linn County. Oregon

Page 18 GAO- 02- 894 Child Care Reimbursement Rates

Table 6: Characteristics of Locations Visited in Oregon Location
Geographic area

Estimated population

Median household

income Percent of

people living in poverty

Portland Urban 529,000 $37,363 15 Washington County Suburban 445,000
$51,775 7 Linn County Rural 103,000 $37,123 12 Statewide Not applicable
3.4 million $39,575 13

Source: Characteristics of the geographic areas were obtained from the
city of Portland government, Washington County government, and the state
of Oregon*s Secretary of State; population estimates, median household
income, and poverty thresholds were obtained from the U. S. Census Bureau
and the city of Portland government.

In Oregon, hypothetical families* access to providers varied slightly and
was limited. For example, of those family home providers who accepted
child care subsidies, 10 percent to 24 percent had fees that were within
the maximum reimbursement rate. Of those child care centers participating,
0 percent to 17 percent had fees within the rate. See table 7 for
comparisons of providers* fees, reimbursement rates, and percent of
providers accepting subsidies who charged fees within the reimbursement
rate in three Oregon communities.

Table 7: Comparison of Reimbursement Rates and Providers* Fees for a 2-
Person Family (Parent and 2- year- old) in Three Communities in Oregon

Community Type of child care

Maximum reimbursement

rate Total number of providers

No. of providers accepting subsidies

No. of providers within reimbursement

rate and accepting subsidies

Percent of subsidyaccepting

providers within rate

Portland Family home $386 511 402 98 24 Portland Center $545 61 52 7 13
Washington County Family home $386 486 305 44 14 Washington County Center
$545 44 38 0 0 Linn County Family home $340 201 143 14 10 Linn County
Center $419/ 465a 6 6 1 17

Note: A median price for child care within an Oregon community could not
be calculated because of the manner in which the child care resource and
referral network collects provider fee data (see app. I). a Child care
centers in Linn County are situated in two reimbursement rate areas.

Source: Our calculations based on provider data obtained from the Oregon
Child Care Resource and Referral Network and the Oregon Department of
Human Resources.

Page 19 GAO- 02- 894 Child Care Reimbursement Rates

In the nine communities we visited, most child care providers indicated to
local resource and referral offices a willingness to accept subsidized
children; center providers reported a willingness to accept subsidized
children more often than family home providers. As shown in table 8, 85
percent to 100 percent of child care centers reported a willingness to
accept subsidies compared with 47 percent to 97 percent of family home
providers across the nine communities. State officials considered the
percent of child care providers who were willing to participate in
subsidized child care programs an important measure of access.

Table 8: The Percent of Family Home Providers and Child Care Centers in
Nine Communities Indicating Willingness to Accept Subsidies

Community Percent of family

home providers Percent of child care centers

Chicago (south side), Ill. 97 95 DuPage County, Ill. 47 89 DeKalb County,
Ill. 64 100 Baltimore, Md. 96 100 Montgomery County, Md. 78 91 Wicomico
County, Md. 77 95 Portland, Ore. 79 85 Washington County, Ore. 63 86 Linn
County, Ore. 71 100

Source: Our calculations based on provider data obtained from child care
resource and referral networks in the three states. These figures reflect
intentions providers expressed to local child care resource and referral
offices.

Results from our national survey also showed that the providers*
participation rates varied. In our survey, states estimated that the
proportion of licensed child care providers who participated in their
subsidized programs ranged from 23 percent to 90 percent, with a median of
69 percent. However, even though provider participation was generally
high, local child care resource and referral staff told us that some
providers limited the number of subsidized children they accepted at any
one time and others may have required parents to pay the difference
between the reimbursement rates and providers* fees. (This last point is
discussed in greater detail later in the report.) Most Providers Expressed

Willingness to Accept Child Care Subsidies

Page 20 GAO- 02- 894 Child Care Reimbursement Rates

Although maximum reimbursement rates were the same for all subsidized
families within a community, a family*s share of this rate, or co-
payment, increased as family income increased. 17 For example, for a
family of two in Linn County, Oregon, earning $1,017 a month (100 percent
of the federal poverty threshold) the maximum reimbursement rate for
family home care was $340* comprised of an $85 required family co- payment
and a state subsidy of $255. As the family*s income increased to $1,526 a
month (150 percent of the federal poverty threshold), its required co-
payment rose to $271, and the state subsidy declined to $69. 18 The
relationships among co- payments, state subsidies, and income for a family
of two in Linn County, Oregon, using family home care are illustrated in
figure 4.

17 In the three states we visited, co- payments did not vary by type of
care for formal, regulated providers; they varied in one state (Maryland)
based on geography and in all three states based on family income and
size. Co- payments for families using informal providers were the same as
those for formal providers except in Maryland where they were less.

18 In all three states we visited, 2- person families with incomes at 200
percent of the federal poverty threshold ($ 2,034 per month) exceeded the
income eligibility limits for subsidized child care. Families Faced Larger

Co- payments as Their Incomes Increased

Page 21 GAO- 02- 894 Child Care Reimbursement Rates

Figure 4: Required Family Co- Payments and State Subsidies by Family
Income for Family Home Care in Linn County, Oregon

Source: For family income, U. S. Census Bureau poverty thresholds for 2001
were used. We obtained the amount of the state subsidy and family co-
payment from the state of Oregon*s Department of Human Services.

Required co- payments resulted in families paying from 1 percent to 18
percent of their income for child care across the nine communities.
Oregon, which had a statewide co- payment schedule, required our
hypothetical families to make the highest co- payments of the three states
we visited. 19 Regardless of where they lived, subsidized families with
monthly earnings of $1,526 paid 18 percent of their income for child care.
Maryland, which varied co- payment amounts by region, required families in
Montgomery County to pay higher co- payments than those in Baltimore and
Wicomico County. In Illinois, which also has a statewide co- payment

19 Since March 2000, Oregon has required certain families who are eligible
for the state*s subsidized child care program to pay no more than $25 in
co- payments for the first 2 months. These smaller co- payments apply to,
among others, families who have left TANF for employment, and those
families applying for subsidized child care because of a change in their
circumstances, such as families who are newly employed, families who lost
their low- cost child care arrangements, and families who are no longer
able to afford child care.

0 50

100 150

200 250

300 350

$763 $1,017 $1,272 $1,526 Family monthly income

State subsidy Co- payment (for a family of 2) Maximum reimbursement rate

$298 $255

$183 $69

$42 $85

$157 $271

Page 22 GAO- 02- 894 Child Care Reimbursement Rates

schedule, the co- payments in every community were less than 10 percent of
family income at 150 percent of the federal poverty threshold. See table 9
for monthly income, family co- payment, and co- payments as a percent of
income in the nine communities.

Table 9: Family Co- Payments as a Percent of Monthly Income in the Nine
Communities for Child Care Centers and Family Homes

Location Percent of federal poverty threshold Family

monthly income Family monthly

co- payment Co- payment

as percent of income

Illinois 75 100 125 150

$763 $1,017 $1,272 $1,526

$35 $65 $87 $134

5 6 7 9 Baltimore, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$9 $26 $86 $137

1 3 7 9 Montgomery County, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$12 $36 $121 $194

2 4 10 13 Wicomico County, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$7 $20 $66 $105

1 2 5 7 Oregon 75

100 125 150

$763 $1,017 $1,272 $1,526

$42 $85 $157 $271

6 8 12 18

Source: Poverty threshold data were obtained from the U. S. Census Bureau;
family monthly income and co- payment as a percent of income are our
calculations based on data obtained from the U. S. Census Bureau and the
Illinois Department of Human Services, three local subsidy offices in
Maryland, and the Oregon Department of Human Resources; the family monthly
co- payments were obtained from the Illinois Department of Human Services,
three local subsidy offices in Maryland, and the Oregon Department of
Human Resources.

While co- payments can be considered as a percentage of family income,
they can also be considered as a percentage of the total reimbursement
rate; this provides some sense of the portion of the total fee borne by
the family and, to some extent, the benefit of participation in the
subsidy program. When considered in this way, a family*s co- payment
represented from 2 percent to 80 percent of the reimbursement rate; Oregon
families paid the largest share of the reimbursement rate. For example, in
rural Linn County, families who earned 150 percent of the federal poverty
threshold were responsible for a monthly co- payment of $271, which
represented 80 percent of the reimbursement rate for a family home
provider. This share was significantly larger than that paid by similar

Page 23 GAO- 02- 894 Child Care Reimbursement Rates

families in the rural communities of DeKalb County, Illinois, and Wicomico
County, Maryland, who were responsible for paying 32 percent of the
reimbursement rate for family home providers. In addition, in Oregon and
Illinois, rural families paid a larger share of the reimbursement rate
than families in urban and suburban communities (see table 10). Families
at the lowest income levels in each community paid a relatively small
share of the total reimbursement rate.

Table 10: Family Co- Payments as a Percent of the Maximum Reimbursement
Rate for Child Care in Maryland, Illinois, and Oregon Communities for
Family Home Care

Location Percent of federal poverty threshold

Family monthly income

Maximum reimbursement

rate for family home care

Family monthly co- payment

Family copayment as a percent of the

maximum reimbursement

rate

Chicago and DuPage County, Ill. 75

100 125 150

$763 $1,017 $1,272 $1,526

$466 $466 $466 $466

$35 $65 $87 $134

7 14 19 29 DeKalb County, Ill. 75

100 125 150

$763 $1,017 $1,272 $1,526

$414 $414 $414 $414

$35 $65 $87 $134

9 16 21 32 Baltimore, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$429 $429 $429 $429

$9 $26 $86 $137

2 6 20 32 Montgomery County, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$596 $596 $596 $596

$12 $36 $121 $194

2 6 20 33 Wicomico County, Md. 75

100 125 150

$763 $1,017 $1,272 $1,526

$325 $325 $325 $325

$7 $20 $66 $105

2 6 20 32 Portland and Washington County, Ore.

75 100 125 150

$763 $1,017 $1,272 $1,526

$386 $386 $386 $386

$42 $85 $157 $271

11 22 41 70 Linn County, Ore. 75

100 125 150

$763 $1,017 $1,272 $1,526

$340 $340 $340 $340

$42 $85 $157 $271

12 25 46 80

Page 24 GAO- 02- 894 Child Care Reimbursement Rates

Source: Our calculations of family income were based on data obtained from
the U. S. Census Bureau; maximum reimbursement rates for family home care
in Illinois were based on our calculations of data obtained from the
Illinois Department of Human Services, three local subsidy offices in
Maryland, and the Oregon Department of Human Resources; family monthly co-
payments were obtained from the Illinois Department of Human Services,
three local subsidy offices in Maryland, and the Oregon Department of
Human Resources; family co- payments as a percent of the maximum
reimbursement rate are our calculations based on data obtained from the
Illinois Department of Human Services, three local subsidy offices in
Maryland, and the Oregon Department of Human Resources.

Even though our analysis showed that some reimbursement rates did not
afford hypothetical families much choice among specific types of child
care, state and local officials noted that actual families* child care
options may not be strictly limited by the reimbursement rates. In all
three states we visited, families could choose providers whose fees
exceeded the state- established reimbursement rates* by paying the co-
payment and the difference between the providers* fees and the
reimbursement rates. Families were responsible for these additional
payments, and states were generally not part of these financial
arrangements with child care providers. State officials could not provide
data on how often this occurred.

In other instances, state and local officials told us they believed that
some regulated providers subsidized the state child care program by
accepting maximum reimbursement rates as full payment* even though the
rates were less than the fees charged nonsubsidized families. These
officials said that some providers were willing to do so because there was
more certainty in receiving state subsidies than private payments from
nonsubsidized families. They also told us that some child care providers
may build a loyal customer base by accepting reimbursement rates as full
payment until families can afford to pay the extra amount. Again, state
officials could not provide data on how often this occurred or what
adjustments providers made, if any, to accommodate any such foregone
revenues.

Consistent with federal law, all three state child care programs also
allowed subsidized families to use informal child care providers (i. e.,
unregulated, legally operating providers) in addition to formal, regulated
providers. Subsidized families in the three states we visited varied in
how frequently they chose this option. States estimated that 25 percent of
subsidized families in Maryland, 57 percent in Illinois, and 60 percent in
Oregon relied on informal care providers. In our survey, state officials
reported that families chose informal providers for many different reasons
including convenience, flexibility in hours, and lower costs. State and
local officials mentioned that some informal child care providers were
willing to According to State and

Local Officials, Reimbursement Rates May Not Necessarily Limit the Child
Care Available to Families

Page 25 GAO- 02- 894 Child Care Reimbursement Rates

forego co- payments because they were aware of the families* financial
circumstances. They could not provide data on how often this occurred.

While subsidized families could choose informal child care arrangements,
the states we visited generally set lower reimbursement rates for these
providers. For example, table 11 shows that informal providers in
Baltimore received a maximum reimbursement rate of $215 which was about
half of the $429 received by family home providers. See appendix II for
information about the reimbursement rates and family co- payments for
informal providers in the other eight communities we visited.

Table 11: Family Co- Payment and State Share of Monthly Child Care
Expenses for a 2- Person Family (Parent and 2- year- old) Using Informal
Providers in Baltimore, Maryland

Percent of federal poverty threshold

Annual family income

Family monthly income

Family monthly co- payment

Co- payment as percent of family monthly

income State share of

monthly child care expenses

Maximum reimbursement

rate

75 $9,155 $763 $4 / www. gao. gov. If
you or your staffs have any questions about this report, please contact me
on (202) 512- 7215. Other staff who contributed to this report are listed
in appendix IV.

Marnie S. Shaul Director, Education, Workforce, and

Income Security Issues Agency Comments

Appendix I: Scope and Methodology Page 28 GAO- 02- 894 Child Care
Reimbursement Rates

To describe how states set reimbursement rates, we conducted a mail survey
of the state child care officials in 50 states and the District of
Columbia, of which 49 responded for an overall response rate of 96
percent. The survey included questions on market rate surveys and other
factors that states may have considered in setting rates. 1 While we asked
state child care administrators to assess the importance of various
factors in setting reimbursement rates, we did not independently verify
their assessments by, for example, comparing historical data on these
factors with actual state decisions. In addition to gathering this
information through our survey, we interviewed state child care program
officials in Illinois, Maryland, and Oregon to learn how they set
reimbursement rates. We also interviewed consultants who assisted state
program officials with analyzing their market rate survey results.

In selecting the states for our field work, we sought to include states
that had (1) child care resource and referral (CCR& R) networks with
comprehensive data on providers and the fees they charged; (2) model
market rate surveys; (3) varying income eligibility limits, reimbursement
rates, and co- payment fees; (4) different utilization patterns for
informal child care providers; and (5) some geographic diversity. We
visited three states and met with officials of state, local, and
community- based organizations in three locations in each state* one
urban, one suburban, and one rural. Our field work was performed in
Chicago, DuPage County, and DeKalb County, Illinois; Baltimore, Montgomery
County, and Wicomico County, Maryland; and Portland, Washington County,
and Linn County, Oregon.

To determine the extent to which reimbursement rates were likely to afford
hypothetical families access to specific types of child care providers, we
obtained data on providers* fees for full- time care from CCR& R network
databases in each of the three states we visited. The local CCR& R offices
in each of the communities we visited collected actual information on
providers* fees. The local CCR& R offices submitted the information about
these fees to their networks that compiled this information throughout the
state. CCR& R networks supplied us with provider fee data for each of the
nine communities we visited. CCR& R databases were relied on because the
data on providers* fees were readily available and current. While we did
not conduct tests for accuracy or

1 Prior to administering the questionnaire, we pre- tested it in three
jurisdictions. Appendix I: Scope and Methodology

GAO Survey of State Child Care Officials

Case Studies in Nine Communities across Three States

Appendix I: Scope and Methodology Page 29 GAO- 02- 894 Child Care
Reimbursement Rates

reliability of the CCR& R databases, state officials and CCR& R staff
expressed confidence in the accuracy and comprehensiveness of the data.

In calculating the percentage of providers who had fees that were equal to
or less than the state- established reimbursement rates, we included those
providers who indicated a willingness to accept Child Care and Development
Fund (CCDF) funded subsidies. This information was selfreported by most
child care providers. In instances where providers did not report whether
they accepted the state*s subsidy or indicate a willingness to accept the
subsidy, they were included in the total number of providers in a
community but were not counted as accepting the subsidy.

Since Illinois provider fees were reported as a weekly rate and
reimbursement rates were set on a daily basis, both sets of numbers were
converted to reflect monthly provider fees and monthly reimbursement
rates. Using a multiplying factor of 4.33, representing the average number
of weeks in a month, we converted providers* fees from a weekly to monthly
basis. 2 Using a multiplying factor of 21.65, representing the average
number of work days in a month, we converted daily reimbursement rates to
monthly rates.

Because Maryland provider fees were reported as a weekly rate and
reimbursement rates were set on a monthly basis, we converted the provider
fees so we could compare them with the state- established reimbursement
rates. Using a multiplying factor of 4.33, representing the average number
of weeks in a month, we converted providers* fees from a weekly to monthly
basis.

Oregon provider fee data were also reported in different time increments
than the state- established reimbursement rates; however, we did not
convert these fee data to a single common unit. Providers reported their
fees in hourly, daily, weekly, or monthly increments; the state
established hourly and monthly rates. Oregon consultants advised us not to
convert provider fee data because providers who charged in different time
increments may operate differently. The consultants suggested that
providers who usually charge in less than monthly increments might offer
slight discounts to families who use their services for a month or longer.

2 We used the same weekly conversion factor (4.33) as used by a consulting
firm contracted by the Maryland Department of Human Resources.

Appendix I: Scope and Methodology Page 30 GAO- 02- 894 Child Care
Reimbursement Rates

As a consequence, we directly compared providers* fees reported in hours
and months to the state*s hourly and monthly reimbursement rates. 3 For
providers* fees reported in days or weeks, we divided monthly
reimbursement rates by 21 (slightly less than the average number of work
days in a month to account for a discount) to determine daily rates. In
addition, we multiplied these calculated daily rates by 5 to determine
weekly rates. We discussed this approach with the consultant who conducted
market rate studies for the state. Because of the complexity of converting
data on providers* fees, we did not calculate a median monthly provider
fee for the three communities we visited in Oregon.

In determining hypothetical families* access to the nine communities
across three states, in one case, we limited the scope of our analysis. To
prevent geographical differences in income from limiting the usefulness of
our analysis and because of the much larger size of the city of Chicago,
we included only that area of Chicago that had a lower average median
income. We selected the lower- income area based on preliminary analysis
that showed a high percentage of providers in the area indicated a
willingness to accept subsidies. Although some higher- income areas are
covered and some lower- income areas excluded, for ease of analysis we
included all contiguous zip codes south of the Chicago central business
district.

Since family co- payments vary by such factors as family income and family
size, and the fees that providers charge also vary depending on a child*s
age and the type of child care, we used a hypothetical two- person family
(consisting of a parent and 2- year- old child) in our analysis. This
family size was selected after reviewing fiscal year 1999 Temporary
Assistance to Needy Children (TANF) recipient data that showed that most
single parent families have one child, and most TANF cases that include
adults have only one parent. 4 The age of the hypothetical child was
selected after reviewing CCDF recipient data on the ages of children
served. To determine the percent of family income that would be spent for
copayments in the three states, we varied family income from 75 percent of

3 Oregon has standard and enhanced reimbursement rates. Enhanced
reimbursement rates are paid to child care centers and group homes that
are certified and to family home providers and certification- exempt
centers that meet professional development requirements. Since most Oregon
providers qualify for enhanced reimbursement rates, these rates were used
in our calculations.

4 TANF data were used because HHS did not have similar data on family
composition of those using CCDF subsidies.

Appendix I: Scope and Methodology Page 31 GAO- 02- 894 Child Care
Reimbursement Rates

the federal poverty threshold to 150 percent of the federal poverty
threshold. We used the same procedure in determining the percent of the
reimbursement rates represented by a family*s required co- payment.

At the federal level, we interviewed officials at the Department of Health
and Human Services in Washington, D. C., and regional offices in Chicago,
Illinois, and Philadelphia, Pennsylvania. We reviewed documents concerning
CCDF legislation, HHS rules and regulations, HHS data and reports on
access for low- income families, and obtained copies of states* CCDF plans
for fiscal years 2002- 2003 that contained the states* co- payment fee
structures, and generally included information about market rate survey
results and reimbursement rates. We also interviewed child care policy
experts and reviewed current literature on subsidized child care. Other
Related

Activities

Appendix II: Reimbursement Rates for Informal Child Care Providers in the
Remaining Eight Communities

Page 32 GAO- 02- 894 Child Care Reimbursement Rates

For the three states we visited, we obtained data on family monthly co-
payments and reimbursement rates for informal providers. These states
generally did not collect information on the fees charged by informal
providers. Moreover, local CCR& R offices generally did not collect
information on informal child care providers or include them in their
databases. As shown in tables 12 to 16, each of the three states we
visited paid rates that were lower for informal care than for other types
of care. States made different choices regarding such rates despite the
lack of information on informal providers* fees, or the effect of
established rates on the supply of such care. See tables 12 to 16 for
reimbursement rates and family co- payments for informal providers in
eight communities we visited. Information on Baltimore, Maryland, is shown
in table 11.

Table 12: Family Co- Payment and State Share of Monthly Child Care
Expenses for a 2- Person Family (Parent and 2- year- old) Using Informal
Providers in Chicago (south side), DuPage County, and DeKalb County,
Illinois

Percent of federal poverty threshold Annual family

income Family monthly income Family monthly

co- payment Co- payment as

percent of family monthly

income State share of

monthly child care expenses

Maximum reimbursement

rate

75 $9,155 $763 $35 5 $170 $205 100 $12,207 $1,017 $65 6 $140 $205 125
$15,259 $1,272 $87 7 $118 $205 150 $18,311 $1,526 $134 9 $71 $205

Source: Federal poverty threshold, annual income and family monthly income
are our calculations based on U. S. Census Bureau data; family co- payment
and maximum reimbursement rate were obtained from the Illinois Department
of Human Services; and co- payment as percent of family monthly income and
state share of monthly child care expenses are our calculations based on
data obtained from the Illinois Department of Human Services.

Table 13: Family Co- Payment and State Share of Monthly Child Care
Expenses for a 2- Person Family (Parent and 2- year- old) Using Informal
Providers in Montgomery County, Maryland

Percent of federal poverty threshold Annual family

income Family

monthly income Family monthly

co- payment Co- payment as

percent of family monthly income

State share of monthly child care

expenses Maximum

reimbursement rate

75 $9,155 $763 $6  HEHS- 00- 7. Washington, D. C.: October 14, 1999.

Child Care: Use of Standards to Ensure High Quality Care.

GAO/ HEHS- 98- 223R. Washington, D. C.: July 31, 1998.

Welfare Reform: States* Efforts to Expand Child Care Programs.

GAO/ HEHS- 98- 27. Washington, D. C.: January 13, 1998.

Welfare Reform: Implications of Increased Work Participation for Child
Care. GAO/ HEHS- 97- 75. Washington, D. C.: May 1997. Related GAO Products

(130090)

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